Thursday, December 07, 2006

Gurdjieff, Turtles, and Trading

Most posts about trading, mine included, are about doing: what to do, what not to do. This is a post about how to do. This is an important post.

In Vonnegut's book Cat's Cradle, there is a religion called Bokononism. It is a collection of lies ("foma") that make life on the dreary island of San Lorenzo more palatable. Among other things, Cat's Cradle is a book about the role of lies in human life.

Philosopher and mystic G. I. Gurdjieff also emphasized the role of lies in human psychology. The greatest of lies that we tell ourselves, Gurdjieff asserted, was that we have free will. In reality, most of our actions are mechanical, tossed here and there by moods, whims, needs, and the impact of external events.

Of course, it is painful to face the fact that we lack control over our own lives. So we create our own personal Bokononisms. We take solace in New Year's resolutions and earnest plans for self-improvement that, like last year's exercise equipment, eventually become part of our forgotten mental furniture.

Psychologists would never exist if people had free will. Those with problems would read self-improvement books, take good advice, and end their problems straightaway. But, no; that's not how human psychology works. We can know what to do and we still don't do it. We know we're supposed to eat healthy foods; we know we should always be appreciative of our spouses; we should exercise, not overspend our savings accounts; and we should cut our losing trades.

Gurdjieff's insight was that we lack intentionality because we fail to remember ourselves. In a state of self-awareness, we vow to do the right things. Once we exit that self-awareness, the right things vanish with it.

Zen masters spend years cultivating the capacity to remember themselves: to remain self-aware. They realize that free will begins with the ability to sustain a single thought--and only that thought. Sit quietly in a dark, silent room and make the effort to focus all your attention on a mental image of an empty vessel. See how long you can sustain the image without your attention drifting to random thoughts and images. Before long, you forget the vessel altogether...

So what does this have to do with trading?

In 1983, Richard Dennis and Bill Eckhardt sought to resolve their dispute over whether trading success could be taught or whether it is inborn. They tested a trading system, to be known as the Turtle Trading System, and taught it to their group of novice traders.

Legend has it that the Turtles went on to become wildly successful traders. But, of course, like much of history, that is a pack of foma.

The Turtles varied significantly in their trading performance. Some followed the rules Faithfully and made significant money. Others did not and could not follow the rules and were dropouts from the experiment. Intentionality, not the system rules (which were the same for all traders), predicted trading success.

And now I will give away the secret of the Turtle Trading System and why it so effectively illustrates Gurdjieff's insights:

The Turtle Trading System is a system for losing money.

It makes losing money scientific and details precisely how it should be done.

Most traders want lies: how to make money easily, without the constraint of rules or the demands of research. They do not want an education in how to lose money, because they do not want to lose money.

And that is why they never make money.

The precise rules for the System are readily available and there is even software that will tweak the rules and identify the most promising markets to trade. According to Alexa, less than 4 people in a million will visit those pages. And, let's be generous and say that 10% of those visitors make the effort of downloading the rules and 10% of them can actually follow the rules to learn how to lose money.

That leaves us with very few people.

Gurdjieff taught, "If we do what we like doing, we are immediately rewarded by the pleasure of doing it. If we do what we don’t like doing the reward must come later. It is a mathematical law and all life is mathematics."

Not many people like learning how to lose.

Losing money with intentionality: that's a useful secret of the Turtle Trading System, even for those who aren't Turtle System traders.

Very deep post that I must spend some time meditating on...I'm kicking myself over a mistake I made this morning, and interestingly I believe this applies. I tried to trade the news release, which I have not once had success doing...why did I make that decision? At least partially it was a loss of awareness of myself (since I otherwise don't trade discretionarily)...anyway thanks.

Oh, and there is a place to get the turtle rules for free online...or there was. Their money and risk management scheme is useful to study.

Thanks for the note, Brandon. I think you're exactly right: we make those mistakes when we lose awareness of our priorities and get caught up in the action (or lack of action) of the moment. One of the reason so many successful traders litter their monitors with post-it notes is that they're using messages to themselves to stay aware!!

I did download that document a year ago, and after your post I re-read it. You got my attention.

Besides from the system, it says some great truths about trading and success.

Thanks for a great blog, and always excellent articles.

Some quotations from ;

"On the whole, we had the confidence and the discipline to consistently apply the rules we were given. This was the secret of our success as traders."

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” - Richard Dennis

Sorry for the confusion. The system lays out not only entries and exits, but precise criteria for money management, stop losses, etc. When you follow the system rules, all your losses are defined and controlled ahead of time. In that context, you could say that the Turtle System is a system that teaches people how to lose money: consciously, using rules; not impulsively and randomly.

The actual returns of the system will depend on the markets traded, as well as the trader's ability to follow the rules.

After re-reading your post and thinking about it a bit...on the one hand it seems like you are implying that we don't have free will, but digging deeper it seems that you are implying that our "will" (whatever that really is)is just a small part of the factors that conribute to our actions...is that right? The problem is a lack of development of this faculty? That's what I take it to say anyway...I don't know how much of that is my own perspective interpreting what I'm presented with.

I would say that "will"--our capacity for sustained, intentional activity--is like a muscle. It develops with exercise, and the role of adversity is to facilitate that exercise through effortful striving. Colin Wilson, in his early works, has written on this extensively. So I'd say that most people have flabby wills, like they have flabby muscles. :-)

Is there a way to access archives of your year of blogging? Also, could you detail your trading tools (software, etc) what you find valuable about each? Also, do you use an online broker or do you phone in your orders?

The archives for my blog are on the home page at right. I also maintain articles on my personal site, www.brettsteenbarger.com.

Tools I use include a real time data feed (e-Signal), Market Delta, and Trade Ideas. All my research is done outside market hours and utilizes data from vendors mentioned on the Trader Development page of my personal site.

I do trade electronically exclusively. I would phone in orders only if there was a problem with liquidity in the market I was trading. But that's never the case in the eminis.

Brett - I not only don't "buy" systems but I don't take free ones either. (You gets what you pays for). I make my own - I discovered about 30 years ago that what works for me might not work for others and vice versa especially vice versa.

Consequently although I have a very successful method (I prefer "process") I would never sell it because it might not work for the purchaser and that would make me feel bad.

I think I had opportunity some years ago to review the Turtle method and for some reason or other didn't find it particularly appealing. I'll look around - maybe I have a copy somewhere.

Anyway thanks for another excellent column - it has me thinking about other things different from Turtles and that is always a good thing.

I like the way you frame trading "methods" as "process". One of the things I like about seeing developed trading systems--even ones I'd never trade myself--is that they model a certain process: a way of getting into and out of trades and a way of managing the risk of that. Thanks for your comments--

Brett,In your comments sections and in my own blog, I've mentioned numerous times my fight against fighting my negative impulses, and, even though I've never qualified it with the term, intentionality. It was great to see that you mention Zen. I've been practicing my own pseudo form of Zen, Buddhism, and a combination of some self help methods I have read (including ideas from your blog and books). While I have to admit I'm still not "there" yet, it has been a big help. This answer is probably for another post, rather than a comments response, but do you have any specific methods for attacking the intentionality problem?

Talking about losing trades, I wish to share my mistake on a night with economic data in view.

I put on a stop buy order for EurUSD and if the data were outside expectations, I would keep the trade if filled. Turned out the data were within expectations and my order was not filled.

The Euro tanked but soon reversed. Without further planning, I entered at market price with the Euro spiking up and was filled at a higher price . I put on a stop of 100 pips away and retired to bed. This morning I found I was stopped out and the Euro has gone further south.

I then received this from my mentor Ray Barros:

"To parapharse, Brett says in his new book: losing isnot that important, what is important is we reviewand learn from our losses."

and more advice :ENTER AT YOUR PRICE RATHER THAN AT THE MARKET'S PRICE

This in itself is an art: When the market isslow moving, enter impatiently - i.e. enterat market. Don't nickel and time the entry.

When the mkt is moving quickly, enterat your price - NOT at any old price.

I have seen traders use the reversestrategy.

* In slow markets, they nickle and dime a slowmarket and miss some very large profitsby a tic or two.

* In fast markets they get caught up in the excitement of moment and get in at any price.

This strategy means the market,i.e. NOT YOU, is in control of the entry:a recipe for long-term loss."

I hope that many people will read your comment and your excellent observations and lessons--especially that piece of wisdom about entering at *your* price, not the market's. I find that paying close attention to the value area of a market (for mean reversion trades) and support/resistance areas (for breakout trades) helps me with knowing good prices for entry. Best of luck, and thanks so much for passing that along--

I appreciated the pointer to the Turtle trading information. It was very helpful in formulating my own plans.

However,.... do the math, and you see that the barest of rules -- no more than 4 buys into one position at 1/2N increments with -2N stops, does not limit the losses to 2% as hoped, but might become as large as 5% on hitting a stop.

One can buy in at 2N increments with -2N stops, one unit at a time, and keep the maximum stopped loss at 2%. Or one can use other fractional buys, like 0.52 units at 1/2N buys, or many other combinations...

Also, after checking the rules out on the DIA, SPY, and QQQQ for the past 700 trading days (since 16 Dec 2003), one finds, as Brett has indicated before, that breakout trading no longer works very well. In fact, none of the markets generated a positive return, no matter how I altered the rules and starting conditions.

The most recent 6 months would have done very well, but all the ups and downs leading up to this past summer would have started the account with a loss that was too large to overcome.

The Turtle challenge was in the market of 1983. Today's market is different -- probably dominated by program trading with very narrow ranges, and record low volatility.

But the most important thing to walk away with is a set of disciplined rules for trading, whatever they may be.

Thank you, David, for the very insightful post. Trend following in the stock indices has, for the most part, been a disaster of late. In defense of the Turtles, however, they traded many different markets and did emphasize those markets that were showing good trending behavior. Some of the commodities markets have been far kinder to trend followers than stocks have been.

My own style of trading is not so much trend following as regime following. I identify a pattern to the trading in the most recent lookback period and will trade that pattern until it works no longer. In that sense, the regime is my trend, and countertrend behavior in stocks 1-20 days out has been the regime.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).